best maxi isa

Let's
start by looking at the Maxi isa which may or may not be the best isa for
you, depending on your personal circumstances. Now the name of this isa is
about to change, however there will be many similarities so for those of you
who already hold these, please don't worry as I will explain the changes in
detail shortly. Now before we start to look in detail at each form of isa,
it is important to realise that all isa's are inter-dependent with one
another.

In other words if you have the maximum holding in one in a
particular tax year, you cannot open another holding. In addition the types
of holding within the isa will also affect the mix of isa's that you can buy
in a particular year - confused - don't worry - I hope the following will
make things a little clearer.

best isas- maxi isa explained

So, what exactly can you invest in an isa? In simple terms you have three
choices as follows :

1. Cash

2. Stocks and shares

3. Life assurance

Now, a maxi isa contains two components and allows you to invest in a
mixture of cash, and stocks or shares. This is the reason it is called a
'maxi isa' and this is a key difference from the mini isa which only has one
element. The Maxi isa therefore gives you two options.

Firstly you can invest the full £7,000 allowance in stocks and shares
which can be in any country anywhere in the world, provided that country has
a recognised stock exchange. Now the investment can be in individual shares
or bonds which you select yourself, but this can be risky. If you understand
the risks involved, and have a detailed knowledge of the markets then
choosing your own stocks or shares is fine, provided you understand the
risks. For less experienced investors or novice traders, I would suggest
buying a collective investment such as a unit or investment trust or
corporate bond in order to spread the risk. In essence these provide a
'basket' of stocks or shares in different markets and sectors, so your risk
is spread across several companies.

Now the second option with a maxi isa is that you can spread your
investment between the two elements ( something you cannot do with a mini
isa) of cash and stocks and shares, but you need to be aware of the fact
that the entire package has to come from one company. In other words you
cannot have part of the maxi with one provider and the second part with
another. Now there are limits on the mix of the two elements you can hold
which are as follows :

Option One : All £7,000
allowance in stocks and shares

Option Two: A maximum of
£3,000 in cash and the balance in stocks and shares

As we can see from the above, the maximum you can hold in cash in a maxi
isa is £3,000, but you have the option to have all £7,000 invested in the
stock market. So for example if you wanted to invest £1,500 in cash, and the
remainder in stocks ( £5,500) then this is fine under the current rules. You
could not however have the reverse as this would exceed the maximum cash
allowed within the isa of £3,000.

In practice, most people who are considering a maxi isa, are generally
more interested in the stocks and shares component. Market statistics
suggest that 98% of maxi isa's are invested wholly in the stocks and shares
element. In 2005/2006, approximately 1.5million maxi isa's were opened with
an average of £4,500 in each in stocks or shares.

maxi isa risks

Clearly from the survey by the FSA which I have already mentioned, many,
many, people ( 40% according to the report) have no idea that the value of a
maxi isa will vary as to whether the stock market is performing well or
badly. At the risk of being boring, I will restate it here - the value of
your isa can rise as well a fall, and you may not actually get back your
original investment. Clearly you should be made aware of this when speaking
to an advisor, but I suspect that many people are not, and only find out
after the value of the isa has declined. When looking at the maxi isa as an
investment product, it is vital that you take a long term view of the market
which should be at least five years, and ideally longer. Because the value
of investments can go down as well as up, you need to give the investments
time to recover if they have suffered a loss as they are NOT guaranteed, so
you may get back less than you invested. I hope I have made the point!

Now one final point which is this - you can only open one isa product per
tax year. So, if you open a maxi isa in the tax year, you cannot them open a
mini isa later in the same year ( and visa versa). So please think carefully
before you open your isa. So is a maxi isa the best isa for
you? I would suggest that in simple terms you should consider the following
as the key decision making criteria :

1. Consider your view of risk - are
you comfortable with investments which both fall and rise in value

2. If you have a detailed knowledge of the stock
market or individual stocks and shares

3. If you can take a long term view of at least
five years

4. If you can tie up your finance for a long
period

OK, I think that's about it on the maxi isa which I hope has given you a
feel for the product and what you should think about when considering this
for your tax free investing. Whether it is the best isa for you will depend
on your personal circumstances and also considering the above points before
you dive in. Now let's look at the next isa, the mini isa which could be an
alternative for the best isa for you.